It’s been a wild ride in the equity markets this year. Especially this week when we saw markets get tested hard yesterday at the open, but then it bounced sharply and broadly. The snap-back rally wasn’t the matter of the few mega-cap stocks moving the indices — it was a broad participation across most sectors. This points to the fact that investors are optimistic but cautious. The semiconductor sector, however, is struggling. These are momentum stocks, so they run fast in either direction. Companies like Nvidia (NASDAQ:NVDA) rally long and hard, but when they fall, they fall fast. This makes it difficult for most traders to invest in Nvidia stock. It almost never gives us a clean entry point. On the way up it looks like it’s perpetually about to correct, and on the way down it looks like it’s headed into an abyss.
Case in point, shares of Nvidia fell 10% in the last six days and 16% in a month. So one would think that Nvidia stock is dead. Yet it still up 10% for the year. Therein lies the opportunity.
Is NVDA Worthy of the Risk: Nvidia is the current premier chip company. Experts believe that it has a dominant position in all the right places including artificial intelligence (AI) and the self-driving auto sector. So this 20% correction off the recent high is likely an opportunity to start building a long position in Nvidia stock.
This is not the case of a broken company but rather a broken stock. Corrections are healthy when they happen in strong fundamentals. This dip merely shed a lot of froth in order to build a better base for more upside. This consolidation is necessary in all rallies.
Technically, it has fallen into its support zone. I think of it as a rubber band, not a hard line. The area around $200 for share is this year’s pivot point. It was resistance up until January but has served as support since then.
It should continue to provide support unless the market, in general, corrects another 10% from current prices. Even then, I see a similar level at $180 per share.
The macroeconomic conditions are still bullish. The company’s profit-and-loss statements are healthier than ever and demand on technology is larger than ever. We are not going to give up our tech. And this is a trend that will not roll back. So the supplier companies like Nvidia and Intel (NASDAQ:INTC) will continue to prosper for years to come.
Fundamentally, it is not cheap. NVDA is almost three times more expensive than Intel from a price-to-earnings perspective. At a 33 trailing P/E it is not bloated either. This is 30% cheaper than Alphabet (NASDAQ:GOOGL) stock.
I believe owning Nvidia shares for the long-term will be a profitable proposition. But given the current threats to the macroeconomic and the global uncertainties from the U.S. Federal Reserve and the U.S.-China trade war, any new bullish position should be done in tranches.
I don’t go all in all at once. Volatility is still too high. We are coming into the biggest reporting day of the quarter and it will move markets. So caution is key.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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